Economic reports signal modest growth ahead

The Associated Press •December 2, 2009 5:16 am

AP | BDN

AP | BDN

In this Nov. 24, 2009 photo, Brian Plourde of Easy Living Homes puts shingles on a roof of a home in Yarmouth, Maine. Construction spending posts tiny gain in October, led by huge rise in residential activity.(AP Photo/Robert F. Bukaty)

NEW YORK — The economic recovery seems on track for slow but steady gains after new reports Tuesday showed growth in manufacturing activity, construction spending and contracts to buy homes.

The batch of new economic data lifted spirits on Wall Street. But analysts cautioned that the economy won’t come roaring back from the worst recession in seven decades. Some say the rebound’s modest growth could falter next year as unemployment keeps rising.

“We have a recovery, but it is going to be a slow one,” said David Wyss, chief economist at Standard & Poor’s in New York. “People are still reluctant to add workers.”

In one hopeful sign, the Institute for Supply Management said its manufacturing index showed growth in November for a fourth straight month. The reading of 53.6 was slightly lower than October’s 55.7. But any reading above 50 indicates growth.

Economists were especially encouraged that new orders — a gauge of future production — jumped last month. Of the 17 industries surveyed, 13 reported higher orders.

A second report on construction spending from the Commerce Department also signaled growth, with the first overall increase in six months. The increase was slight — just 0.04 percent. But it appeared to indicate that the construction sector is stabilizing.

The October rebound was fueled by a 4.4 percent surge in residential construction, the largest gain in more than a decade. Builders rushing to begin work before the expiration of a tax credit for first-time home buyers propelled the increase. The credit has since been extended and expanded to some existing home owners.

A third positive report showed that the number of homebuyers who signed contracts to buy previously occupied homes rose for the ninth straight month in October. This increase, too, came as buyers rushed to take advantage of the homebuyer tax credit.

Every region enjoyed year-over-year gains in pending sales, according to the report by the National Association of Realtors. Typically, there’s a one- to two-month lag between a contract and a final deal, so the index tends to anticipate future sales.

U.S. auto sales also showed more signs of stability in November as the industry struggles to recover from a plunge that began last year. Last month’s big winner, again, was South Korea’s Hyundai, which posted double-digit sales growth. Sales at the top three U.S. sellers — General Motors, Ford and Toyota — held steady, while Chrysler struggled again.

Auto sales overall had been unchanged in October from a year ago. Analysts say that if that trend can continue, it will show the auto sector is at least stabilizing after a disruptive period in which the government provided billions of dollars of support to Chrysler and GM.

On Wall Street, major stock indicators posted strong gains, partly on the belief that the latest reports pointed to a sustained economic rebound. The Dow Jones industrial average traded above 10,500 for the first time since October of last year. The Dow ended the day 126 points higher at 10,471.58.

In the ISM report on manufacturing, analysts were impressed that new orders jumped past 60 for the third time in the past four months. The last such streak was in 2005.

Chris Liddell, chief financial officer for software giant Microsoft Inc., has predicted that corporations could start replacing aging PCs and servers starting in 2010, “although it could be gradual and occur over a couple of years.”

Moline, Ill.-based Deere & Co., said it’s keeping its inventories lean because it expects farmers to remain cautious about equipment purchases. The company expects sales of large farm equipment to fall more than 10 percent in 2010.

The fate of the recovery will depend, in part, on whether consumers will spend even as unemployment keeps rising. The jobless rate for November, a figure the government will release Friday, is expected to remain at a 26-year high of 10.2 percent.

Wyss expects the jobless rate to hit 10.7 percent in July before starting to improve. He also forecasts that the overall economy will grow at a sluggish rate of around 2 percent in the current quarter and through the first half of next year.

The economy, as measured by the gross domestic product, expanded at an annual rate of 2.8 percent in the July-September quarter after four straight quarterly declines. But growth may slow a bit in the current quarter and even more next year as the effects of the government’s stimulus programs begin to wane.

The Commerce Department report on construction spending showed that nonresidential activity remained weak as work at office buildings, hotels and shopping centers declined. That weakness, though, was offset by the surge in homebuilding.

The Realtors’ seasonally adjusted index of sales agreements rose 3.7 percent from September to 114.1. It was the highest reading since March 2006. And it was nearly 32 percent above a year ago — a record-high annual increase.

Analysts said the slight dip in the ISM manufacturing survey in November wasn’t surprising given the big gains in previous months.

“The recovery in manufacturing is continuing, but many are still struggling,” said Norbert Ore, chair of the survey committee.

AP Business Writer Tali Arbel and AP Real Estate Writer J.W. Elphinstone in New York contributed to this report.